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Abstract
The statute and regulations require the taxpayer to determine its qualified production activities income (QPAI) on a net basis. This analysis examines these net-basis requirements under the final Section 199 regulations and suggests certain planning options. After the taxpayer determines its domestic production gross receipts, Reg. 1.199-4(a) requires the taxpayer to subtract the following amounts: 1. the cost of goods sold that are allocable to DPGR, 2. the amount of expenses, losses or other deductions that are directly allocable to DPGR, and 3. a ratable portion of other deductions not directly allocable to DPGR or to another class of income. Reg. 1.199-4(e) provides that certain taxpayers may apportion deductions to DPGR using the simplified deduction method. Tax practitioners would recommend that the final production incentive regulations increase the simplified deduction method threshold. The taxpayer should consider two planning ideas: 1. The taxpayer may be able to increase benefits from the domestic production deduction by shifting costs from DPGR activities to non-DPGR activities, thus maximizing qualified production activities income. 2. The taxpayer may be able to increase benefits from the domestic production deduction by establishing favorable inventory pools or groupings.